When a government imposes a tax on buyers of a product, such as MP3 players in this case, the ultimate impact on the price paid by the buyers can be analyzed using basic economic principles of supply and demand as well as market equilibrium.
Here’s a step-by-step explanation to understand this scenario:
1. Tax Introduction:
When a [tex]$5 tax is levied on buyers, they now have to pay the market price plus an additional $[/tex]5 for each MP3 player.
2. Demand Shift:
The demand curve will effectively shift downward by the amount of the tax. This occurs because buyers are less willing to purchase at the same quantity as before for any given price. The new demand curve represents the willingness to pay, minus [tex]$5 due to the tax.
3. Market Adjustments:
- As buyers are less willing to purchase the same quantity at the current market price, the demand decreases as the price perceived by them includes the additional tax.
- Sellers may respond to the decreased demand by lowering the price to attract buyers back to the market.
- Consequently, the final price paid by the buyers is affected by both the original market price and the amount of tax.
4. Price Impact:
a. If the price increased by more than $[/tex]5: this would mean sellers are passing on the entire [tex]$5 tax plus an additional amount to buyers. This situation is unlikely because it would deter buyers even more and severely affect sales.
b. If the price increased by exactly $[/tex]5: this means the entire tax is passed on to the buyers without any change in the behavior of sellers, which is also uncommon due to market competition and adjustments.
c. If the price increased by less than [tex]$5: this is the most likely scenario. Here, part of the tax is absorbed by the sellers (reducing their received price), and part is borne by the buyers. This happens due to the interactions and equilibrium adjustments in a competitive market.
d. If the price decreased: this scenario is unrealistic when a tax is introduced because it would contradict the purpose of a tax, which is generally to raise revenue or discourage consumption.
Based on this detailed economic analysis, we conclude that the most likely outcome would be that the price paid by buyers would increase by less than $[/tex]5.
Therefore, the correct answer is:
c) increase by less than $5.
